San Francisco Frontiers - European stock markets drop, dollar firms

"European shares are flashing red amid the market caution with risk appetite taking another hit thanks to disappointing manufacturing activity data," noted Lukman Otunuga, senior market analyst at FXTM.

This offset optimism that other central banks would shortly follow Australia in bringing an end to the policy of raising interest rates, as inflation cools.

Australia left its key interest rate unchanged at 4.1 percent on Tuesday, the second pause in a row.

Analysts said that the Bank of England could carry out a final rate hike Thursday, while the Federal Reserve is increasingly seen as pausing in September.

The outlook is less clear for the European Central Bank.

Major Asian stock markets closed mixed as investors struggled to maintain early gains fanned by hopes the Fed's interest-rate hiking campaign had run its course.

Positive data out of Washington in recent weeks, particularly falling inflation, has been compounded by China's recent promises of stimulus measures to kickstart growth, as the country's post-Covid recovery grinds to a halt.

Traders are now keeping a close eye on earnings this week from tech titans Apple and Amazon, and US jobs data at the end of the week that could provide an idea about the Fed's thinking.

All three main indices on Wall Street ended on a positive note Monday, with the S&P 500 at a 16-month high.

"The challenges companies have endured -- stubborn inflation, weak markets, and sluggishness internationally -- are no longer headwinds," said Michael Wilson at Morgan Stanley.

"Now, we're not only seeing tailwinds heading into 2024, but we're getting less disruptive reactions in the stock market following earnings reports."

- Key figures around 1100 GMT -

London - FTSE 100: DOWN 0.2 percent at 7,681.48 points

Frankfurt - DAX: DOWN 0.7 percent at 16,328.11

Paris - CAC 40: DOWN 0.8 percent at 7,440.32

EURO STOXX 50: DOWN 0.8 percent at 4,434.71

Tokyo - Nikkei 225: UP 0.9 percent at 33,476.58 (close)

Hong Kong - Hang Seng Index: DOWN 0.3 percent at 20,011.12 (close)

Shanghai - Composite: FLAT at 3,290.95 (close)

New York - Dow: UP 0.3 percent at 35,559.53 (close)

Euro/dollar: DOWN at $1.0982 from $1.0997 on Monday

Pound/dollar: DOWN at $1.2798 from $1.2834

Euro/pound: UP at 85.82 from 85.67 pence

Dollar/yen: UP at 142.74 yen from 142.28 yen

West Texas Intermediate: DOWN 0.6 percent at $81.29 per barrel

Brent North Sea crude: DOWN 0.3 percent at $85.15 per barrel

N.Wilson--SFF